Brazil Adopts Thin Capitalization Rules

Until very recently it was true to state that there were no rules on thin capitalization in Brazil which prevented foreign companies to use intercompany loans instead of direct equity investments in order to transfer funds to finance the activities of their Brazilian subsidiaries. However, this is no longer the case! By means of Provisional Measure (Medida Provisória – MP) No. 472, of December 15, 2009, the Brazilian tax legislation has been substantially amended and for the first time includes, among the various changes, the so-called "thin capitalization rules", which will be outlined below. At the end of this article, we will also comment another novelty contained in the same MP 472/2009 which is very relevant and needs to be highlighted - how a Brazilian resident may be free of its status as a local taxpayer for Brazilian tax purposes.